Gold and silver: will they get worse before they get better?

It’s easy to say ‘don’t panic’ but gold’s fundamentals still look good. By well-researched data, Chinese demand is soaring again – the latest Shanghai Gold Exchange figures have had weekly gold withdrawals from the exchange running at the 50-60 tonne levels for almost a month now, which equates closely to global new mined gold supply on its own. Indian demand has been picking up so much that it has the government concerned again. In total it is difficult to see from where all this gold is coming.

Jeff Nichols sums up the situation pretty succinctly in his intro paragraph to his latest offering: “Autumn has been a cruel season for gold investors. In contrast to some anticipated seasonal bump up, the yellow metal’s price has been driven lower by bearish technical indicators and excessive negative sentiment among a small number of large-scale institutional speculators – bullion banks, hedge funds, program traders and the like – trading mostly in futures and over-the-counter “paper” markets for very short-term gains, while remaining indifferent to the metal’s long-term bullish fundamentals.”

You may recall that some time back, in a very bullish technical analysis we published on Mineweb, Peter Goodburn, of Elliott Wave technical analysts WaveTrack International, was looking to a very sharp fall in the gold price indeed but followed by a very rapid and steep recovery to new record levels. His timing has been off in the event but this whole scenario could yet be played out just a few months behind his initial predicted schedule because the gold price fundamentals look so strong given the high levels of eastern and Russian demand.

It will probably take a specific trigger to set the turnaround off, but there are plenty of potential elements out there to do this. However, be warned, on Goodburn’s scenario, gold could yet have further to fall before the sharp recovery he predicted starts to take effect. High levels of Asian demand do not necessarily move the price positively as we saw throughout 2013.

And silver has been suffering just as bad – if not worse. The gold:silver ratio is getting close to a pretty horrendous 75, and possibly getting worse before it gets better, but again, as we have said before, when gold does turn around, which it inevitably will at some time, the additional leverage in the silver price could generate some huge gains for silver investors – but it’s all a question of picking the bottom to maximize these returns and that is no easy task.

The bullish gold commentators have been saying the bottom is in at frequent intervals over the past two years, but we may not have actually seen it yet. There could be yet more grief ahead for gold and silver investors.

And gold stocks are mostly faring even worse. Even the best ones are down 50% or more from their peaks and the juniors have, for the most part, been truly decimated. Many are on life-support which means that gold exploration is probably as close to a standstill as it is ever likely to be.

A dearth of exploration means a distinct lack of new projects going forward, which means once the spate of expansions and new mine developments prompted by the rising prices of the first decade of the 21st Century are all through the pipeline (which is round about now), global gold production will be on the decline and will remain so for several years.

We expect the global gold production decline to begin by the end of this year. Thus, as a few have already noted, peak gold looks like being here now – the lack of big new discoveries even before the downturn set in suggests that global gold output may never again reach current levels.

These are the kind of concrete fundamentals that suggest a recovery in the gold price lies ahead, but as long as the markets are controlled by paper futures sales, vastly in excess of physical gold availability, this could still be a time coming. While irrational exuberance has investors piling into general equities, which look to be overvalued, this too could have a continuing dampening effect on the gold price as investors seek better returns elsewhere. Nichols avers: “…gold will have trouble moving higher and could be set up for a further great fall.”

But maybe, when even the basically gold bullish commentators like Nichols start suggesting there could be a further steep downturn, this could be the sign that things are actually about to turn for the better?